Just about every service provided or product produced has the ability to harm consumers or clients in some way. It is for this reason that product liability insurance is an absolute must for small businesses. Small businesses are held accountable for many claims, including, defective products, instructions or warnings, negligence, or breach of warranty. The purpose of product liability insurance is to protect the business from these types of claims. In a general liability policy, this coverage is often referred to as products-completed operations insurance.
In order to better understand the importance of this type of coverage, it is crucial to comprehend the potential liability. There are three common types of products-related «claims» a small business may face:
- Defective Design- This refers to any claim that the product’s design is unsafe for consumers. A memorable example of this type of claim is the 1970’s suit against Ford involving a Pinto car series.
- Production or Manufacturing Flaws- This refers to any claim that portions of the manufacturing process have created a defect deemed unsafe in the end result product. An example of this is the recent claims brought against manufacturers in China in relation to the appearance of hazardous chemicals in products.
- Defective Instructions or Warnings- This refers to a claim that the product was improperly labeled or was not sufficiently labeled with warnings in order that the client is able to fully understand their risk. The McDonald’s «hot coffee case» is a prime example.
The awarded damages in many of these claims often include expensive medical bills, economic and compensatory damages, and, in many cases, legal costs and fees, as well as, punitive damages. Claims on product liability can easily ruin and end small businesses, and very often do.
Commercial sales businesses and retailers very often fail to implement this type of coverage. They belief is that, since they did not «manufacture or produce» any product, the policy is not a necessity. The truth is, however, that these types of businesses are also subject to lawsuit due. Wholesalers and retailers are commonly involved in suits for alleged negligence by the client. The majority of states follow the «stream of commerce» liability model, meaning that if the business participated in getting the product into the «stream of commerce,» it is to be held liable for damages to the consumer.
If the small business takes part in providing any products or to public consumers, then that small business absolutely needs completed-operations or product liability coverage. Some form of this coverage is usually part of the general liability portion of the business owners’ policy, however small business owners should confirm this with their insurance agents. It is important to have a clear understanding of the business’ coverage.
Product liability policy premiums are based on product ratings derived from the product sales, the actual product, who will be using the product and for what purpose, the length of time the product is expected to last, the materials the product is made from, how clearly labeled the product is with instructions and warnings, and the exact purpose of the insured business in the process of production. Make sure that the business does not report numbers lower than the actual sales of the product to avoid penalties for underinsurance, and make sure that the product is properly identified in the policy to avoid higher classification of risk potential.
Products liability insurance may cover bodily injury and allow payment to the consumer in the amount of cost of care, loss of services, and restitution resulting from injury related to use of the product. It may also cover property damage resulting from use of the product in the amount of physical property damage and loss of property use resulting from that damage.